Abstract
Using consistency in monthly returns as a proxy for good and bad economic news, I show that investors overreact to a series of favourable and unfavourable news. However, bad economic news plays a greater role in shaping investors’ expectations than good news. Consistent losers exhibit stronger price momentum in Year 1 followed by a more pronounced and persistent price reversal in Years 2 through 5 relative to their consistent winner counterparts. This evidence is robust to the three-factor Fama-French model and momentum factor. Results reported in this study provide general support to the psychology-based theories, but none of the existing models fully captures the weighting differential that negative and positive information signals play in shaping investors’ expectations.
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